Mark McHugh

Is The SLV Wired To Blow?

In Conspiracy, Government, Humor, Leveraged ETF, Mary Schapiro, Open Thread, SEC, Silver, stocks finance on Friday, April 29, 2011 at 8:13 pm

I’m not real big on suspense, so I’ll tell you upfront, I think so.  Once again, we may be about to find out what happens when regulators are asleep at the switch.

As of this writing there are 364 million shares of SLV outstanding.  In the past five trading days (April 25 – 29) more than 755 million shares have been traded, and get this, more than 10 million ounces of silver were taken from the trust between the 26th and the 28th, taking available shares with them.  From Stockhouse.com :

Note: Stockhouse.com is the only free website that I know of that accurately tracks the number of ETF shares outstanding and changes (wish I could say the same of my broker).  Enter the ETF ticker with the suffix “.SO”

At what point does trading volume relative to existing shares become unbelievable?

Information on institutional holdings of ETF shares is also hard to find. but according to nasdaq.com, 86 million shares of SLV are held by institutions, but that does not include any holdings reported since April 1, 2011.  And speaking of missing data, does anybody know where China Investment Corp’s 13F‘s  are?  The sovereign wealth giant filed its initial holdings with the SEC on February 5, 2010,   but no additional data has been released.  The SEC requires the form to be filed within 45 days of the quarter’s end. 

The point is that the SLV has become one of the most heavily traded instruments on our exchanges and there is an all too finite number of shares.  There’s at least some evidence that the SECs institutional holdings data is outdated and/or incomplete.   What happens when all the shares are spoken for?  If it hasn’t happened already (I suspect it has), it should soon…..

Then what?

Will the SEC suspend sales of the SLV?  Will the SLV start trading at huge premiums to NAV?  Will the SEC even notice?

I don’t know about you, but I’m going with “SEC will never notice,”  because they have no mechanism in place to ensure “shares owned” doesn’t exceed shares outstanding (remember Mary Schapiro’s only qualification to Chair the SEC is her inability to recognize a Ponzi).

Obviously if SLV starts trading at huge premiums, it isn’t tracking the price of silver anymore.  It will have a market dynamic unto itself.  Suspending sales until more silver is deposited with the trust  will immediately cause a run on physical silver the likes of which has never been seen before.  The silver exchange on the COMEX will blow up in a matter of minutes, followed shortly thereafter by JP Morgan and the class structure of western civilization.  If you don’t know how tight the silver supply is getting, take a peak at this chart from 24HOURGOLD:

Kudos to 24hourgold.com for doing a better job tracking the rapidly vanishing supply of registered silver than the COMEX!!!!  (Hope it’s OK I stole a screenshot).

To make matters even worse, SLV trades options.  Lots and lots and lots of options.  So when the shares outstanding are all sold, there will be people with call options, who have bought the right to buy shares of SLV at a given price.  Forcing cash settlement means the SLV no longer can claim to track the price of physical silver, because the purchase of silver by an authorized participant to create the shares to cover the options would have surely moved the price of the metal.

So once again America, ignoring the grim reality of the situation is the only logical course of action.  The SEC knows all too well that that’s what porn sites are for.  So unless somebody posts this on Pornhub……

I’m sure that Tyler Durden’s instincts will be proven correct again, when he stated that Blackrock’s Kevin Feldman’s defense of the SLV was a red flag in and of itself.  Blackrock is the sponsor of the SLV, and Kevin urged everyone to read the prospectus.  That was probably not such a good idea.  Be extra careful when you try to download the prospectus, I got the following warning:

Comedy ensued after using Firefox (safe mode) to view the prospectus:

“The sponsor does not exercise day-to-day oversight over the trustee or the custodian” 

Which seems to conflict with Kevin’s letter:

“At BlackRock, we take the responsibility of protecting shareholder interests very seriously and spend a lot of time constructing our iShares products to help ensure they meet investor expectations.”

So in reality Blackrock takes protecting shareholders about as seriously as the US Department of Justice takes perjury.  To his credit, Kevin did link to a list of bars the SLV holds in some vaults over in England.  The list was prepared by JP Morgan, because if you can’t trust them regarding silver, who can you trust?  Rather than spoil all the potential ways the SLV might not meet “investor expectations”, I thought it would be fun to make a contest of it (see comments).

The SLV pimps out the price action of the silver it holds to shareholders.  It can terminate the trust for a long list of reasons, not the least insignificant of which is if  the Authorized Participants (who actually own the silver) feel like it.

Suddenly everybody has an opinion of what the price of silver should be, but as JPM is now finding out, if you don’t have silver to sell your opinion doesn’t count.

I don’t wish any ill on SLV shareholders, but make no mistake, you don’t own silver.  History has not been kind to people who made similar mistakes,  and recent history should tell you no one is looking out for you. 

 Miscellaneous Fun Facts:

  • In February, 2007 the author contacted the SEC via email regarding Countrywide Financial CEO Angelo Mozilo’s insider trading.
  • In March 2007 the author applied for an SEC bounty regarding Angelo Mozilo’s insider trading (up to 10% of recovered amount) .  Countrywide’s stock was trading at about $37 at the time.  It would trade over $40 in May and implode to less than $5 by late 2007.
  • On June 4, 2009 (27 months later) the SEC charged Mozilo with insider trading and securities fraud.
  • In October 2010 Mozilo agreed to pay $67.5 million in fines to the SEC to settle the charges against him.
  • At its peak, Countrywide had a Market Cap of more than $26B.  Angelo Mozilo has an estimated net worth of $600 million.
  • The SLV currently has a Market Cap of approximately $17B.
  • The author never received a bounty from the SEC, because the Dodd-Frank “Financial Reform” legislation repealed the previous SEC bounty program.  Bounties can no longer be paid based on an outsider’s analysis of publicly available information.
  • In 2010, the author applied for a job as an “abusive trading practices specialist” with the SEC.  He received no reply.
  • In February 2011, the US dropped its criminal investigation against Mozilo.
  • Paybacks are a bitch.

Common sense (and a little math) tells me that the SLV is already a fraud.  When that becomes obvious to all is anyone’s guess, but based on my past experience, neither the SEC nor the CFTC will recognize it until about two years after it implodes.

***

Update:  Thanks a million to Steve Quayle!!!  He is the only major blogger who has linked to this story thusfar (kind of makes you wonder how much some of these other guys value truth).  This story needs to be discussed.  If you’ve got a blog, take this story and run with it!

****Max Keiser has now added the story too, Thanks Max!

****Jesse’s Crossroads cafe brought it big time!! Thank You, Jesse!

***

 I have to recognize all the people who helped this post see the light of day.  It had been getting easier for me to get things I’ve written promoted….then BAM!  The doors really got slammed in my face with “…Wired to Blow.”  I was confused and angry.  Then I realized something….

One way or another, most of the financial blogoshere is still pretty tight with Wall Street, and every financial pro who has recommended the SLV to clients dropped the proverbial due diligence ball.  I believe that’s why so many didn’t want this story told.  They’re probably going to have some explaining to do soon.   Luckily, a couple of big bloggers (Steve Quayle, Max Keiser and Jesse ) came to help, and I’m very grateful.  But they weren’t the only ones.

I get way more than my fair share of support from relatively small bloggers, just like me, and I have been remiss in recognizing their support.  I spend too much time feeling threatened and jealous of their talent.  But I must say, they really came through for me.  Just look at all the places I got hits from here.  All kidding aside, I am touched.  If you’re new here, feel free to take any of my original content (pictures and/or words).  If it is not credited to anyone else, it’s mine and therefore yours to share.  I’ll be adding a bunch of you guys to the blogroll very soon.

Thanks again,

Mark

  1. Fraud has become the new good business practice, deregulation takes the crime out of crime.

  2. Surely, Gomp.

    So far the lack of response to this post suggests to me that a whole lot of people have been drinking the SLV kool-aid. Is guess they’re still processing their error.

    No SLV defending trolls either.

    Hmmm.

  3. What do you think about SLW and other silver miners?

  4. Unless one of them offers to convert shares for silver, they’re not for me.

  5. Hi Mark, I came from maxkeiser.com. He have you on as well.

  6. Everything this states is true but it is worse then stated.

  7. Max Keiser has posted the story on his website!

  8. THANKS TO MAX, and those who made me aware of him posting the story!!!!

    Thanks Craig. I agree. I didn’t want to be over-the-top here. I figured if a few people looked at the numbers, & read the prospectus, people would realize how bad it is.

    Thanks again!!!

  9. hey with all this massive short selling of silver by JPM and the strong prospects of a huge short squeeze as the vapor inventories are reveled. anyone have any thoughts of backing the truck up on some out of the money puts on JPM and wait for the barn to burn?

  10. Thoughts, yes, but it’s not for me, Ted.

    Even though nobody gets prosecuted for securities manipulation anymore, somehow I just know I would.

    Another reason is just because something should happen, doesn’t mean it will. JPM has already been deemed Too Big To Fail, which means the government will bankrupt every last one of us to save JPM. Justice isn’t really an option for America anymore. As I’ve stated before, taking their silver at the redonkulously low price that THEY set is as close to justice as we’re gonna get.

  11. OK. I’m convinced. Dumping my SLV – not a lot, not a little – tomorrow AM.

  12. Majik,

    I don’t really like to be the bearer of bad news. It’s true I hate the SEC, but once again, they’re dropping the ball. I believe a whole lot of people are gonna get screwed here sooner or later and that’s not an accusation I take lightly. I’m planning a more detailed follow-up, hopefully that will affirm your decision.

    In other news, coin and bullion dealers are often very cool people. Hope you can find one you trust.

  13. I’m physical only, but interesting read. btw, found your article from a link on jessescrossroadscafe.blogspot.com ;-}

  14. Deal with several, thanks. And I’m not complaining about SLV; in a little over a year, tripled my $$$ with it. But this fast running horse is about to trip. You plus Durden (plus my JPM broker recently giving me a fat credit line at minimal interest to keep me in SLV) make a convincing case.

  15. And one more odd thought before I go off to count sheep. What’s the difference between a Bernie Madoff and a Mary Schapiro? Evidently not ethnicity. It’s that…one is in jail. And the other isn’t.

  16. You got it, bro. How she has escaped unscathed is incomprehesible to me.

  17. SLV and GLD are designed as ponzi from the start. Is anybody reading the prospectuses anymore? Are wolves the right custodians for the henhaus? Every moron deserves his Cramer enlightenment, pocket enlightenment, that is.

  18. I accidently deleted this comment from Michele:

    I’m physical only, but interesting read. btw, found your article from a link on jessescrossroadscafe.blogspot.com ;-}

    (don’t know how to restore it)

    I am so grateful to Jesse and all the other bloggers who helped give this story some attention. I will be recognizing their assistance more formally shortly.

  19. Zezorro,

    I don’t think ANYBODY is reading the prospectus, including pro money managers. In general, it had been getting easier for me to get some reads…….but not on this story. It took me three days to figure out why. I am sooooo grateful to the others who had the courage to promote this one.

  20. […] https://acrossthestreetnet.wordpress.com/2011/04/29/is-the-slv-is-wired-to-blow/ This entry was posted in Uncategorized. Bookmark the permalink. ← Must read report from PIMCO […]

  21. I am glad the traffic on this picked up Mark, you did a good job.

  22. Me Too, Gomp!

    I know you’re always here, and you know that I generally don’t care how much traffic I get. But the situation with the SLV is going on in broad daylight.

    This is really emblematic of the vacuum of critical thought in our markets. In my opinion, it’s far more obvious than Madoff. You can’t tell me we are learning from things like Enron, Madoff and AIG…..

    “Won’t get fooled again” should be our national athem.

  23. No comments section on your new post?

  24. Ummmmmm…….not deliberately.

    I’ll have to see if I can fix that.

    Thanks, Gomp.

  25. […] being manipulated. Mark McHugh, at Across the Street, wrote an article on April 29th titled “Is the SLV Wired to Blow?” He writes: “As of this writing there are 364 million shares of SLV outstanding. In the […]

  26. I have long thought that SLV and all paper silver vehicles are double-claimed at best. But that said, I do not understand why you present the ability to buy/sell options on SLV or other ETF’s for that matter as the deathnails; the AP’s have nothing do with covering those options, as they are not the obligations of the AP’s or anyone else associated with SLV, but rather the obligations of individuals/institutions who agreed to sell the options.

    You says that “the purchase of silver by an authorized participant to create the shares to cover the options would have surely moved the price of the metal,” and this would be true—if the AP’s somehow were under an obligation to “cover the options,” but they are not. They have nothing to do with the settlement of options, and they certainly don’t have to create shares to cover calls.

    So since SLV (nor any other ETF or, in equities, any publicy-traded comapny) is under no obligation to create up shares to cover any calls, ever; even if the call sellers where naked, then they’ll have to figure out some way to meet their obligations to the buyers. The only way there could be “no available shares” is if absolutely everyone refused to sell, which could be overcome if the naked call seller offered some SLV holders the right premium; if that means paying those holders of SLV at lot more than face value to get the shares fullfil the contract, then that is what it means, but in all reality, in that case the option buyer himself would likely happily just settle for a nice chuck of cash over the value, and there would be no impact on any SLV shares price.

    Again, I think SLV is largely unbacked and engaged in fractional-reserve silver certificate sales, but it is just a fact that the “trust” is under no obligation to create up shares or buy silver simply because there are outstanding calls (the sale of which they have no control over, anyway), and I’m not sure why you’d include that as something that makes matters worse. Maybe I’m misinterpreting what you are saying, but this is what you seem to be saying.

  27. I think you misunderstand what I am saying. Understanding what SLV is, it should NEVER have been allowed to trade options. I can paint dozens of scenarios why, but here’s one that should be easy to understand. An entity sells a large number of puts – and there is a substantial price drop (like the one we’ve just seen). They are under no obligation to cash settle. their counterparty must acquire shares for them. Once the shares are acquired, they force an authorized participant to redeem the shares for silver. Look at the staggering number of options.

    You can not seperate the options from what they are supposed to represent. They are not some side-bet completely disconnected from the underlying issue.

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